The government has announced it will scrap the much-criticised 5% penalty fee for those who cash in a Lifetime Isa (Lisa) during the first year.
The new Isa, set to launch in April 2017, offers a generous government bonus of 25%. The bonus, which is capped at a maximum of £1,000 a year, can be utilised by first-time property buyers and those who use the Isa as a retirement savings vehicle.
Last week, financial secretary to the Treasury Jane Ellison said in a House of Commons debate that the charge would not apply in the 2017/18 tax year.
The decision to waive the charge for the first year was made because in that year the government bonus will be paid at the end of the tax year, rather than monthly, as will be the case in subsequent years.
David Dalton-Brown, TISA’s director general, says: "Over recent months we’ve argued strongly that the penalty charge of 5% was simply unfair, particularly where no government bonus would be payable."
"We believe the Lisa is a good initiative, and is a much-needed incentive for those who currently find it hard to save or to consider doing so. It also benefits the self-employed and low-paid who do not quality for auto enrolment scheme benefits, and helps to encourage earlier engagement with retirement savings."
But Steve Webb, former pension minister and current director of policy at Royal London, is critical of this development. He comments: "This announcement is a further sign that the Lisa has not been properly thought through. The new product, which is a complex hybrid between a pension and an Isa, is due to be implemented in just a few months’ time, and yet the government is still making up the rules as it goes along.
"To have one set of rules on withdrawals for 2017/18 and another for the year after, and to move from annual government top-ups in 2017/18 to monthly ones in 2018/19, will add yet more confusion to an already complex product."
The pensions industry has previously also warned the Lisa could encourage younger savers to opt out of automatic enrolment pension schemes, which would result in a loss of employer contributions.
This story was originally wrtitten for our sister magazine, Money Observer.